The Credit Spread

Up to this point here at Equityscholar.com We have had the privilege of reading many of your technical analysis related questions and responding to them. With that in mind, I have decided that pulling from this pool of questions would be an ideal place of inspiration. Here I go…

In Lesson 3 of the Options trading course we speak about making money in three directions: up, down and sideways. Knowing that the credit spread is a strategy employed in a sideways moving market it is appealing to many of us when the market is doing precisely this, moving sideways.

The key to this strategy is the understanding that so long as the price action does not reach within parameters of the spread we are a-okay…as the adage goes, you set it and forget it. The problem occurs when the price action decides to move against us. What to do? This is the question I often times receive. “What do I do now that I have placed this spread and the price action decided to run head first into my short leg. What do I do!?!”

I am a major proponent of spreads, I especially love weekly spreads; great tool to have in your back pocket for the appropriate time! That all said, one of the caveats I often share with my coaching students and now you, is that prior to placing a single spread you had better understand and more importantly be comfortable with trending trades. Yes, I’ve said it. To all of those readers out there with the thought that: well I can just place spreads forever and not ever have to place a trending trade you are oh so wrong. Well not really…you can always just take a loss… But to those of you who would like an opportunity to unravel the spread it is best to understand how to do just that: Trade to targets, enter a trade upon seeing/receiving confirmation, and simply trust your analysis.

 Instead, prior to setting up your next spread, simply make sure and practice thoroughly the unraveling process.